PI Partnership


EMERGING MARKETS CORPORATE BONDS: THE ACTIVE OPPORTUNITY


Samy Muaddi Portfolio manager, T. Rowe Price


At a time when passive investing continues to gain market share, emerging market (EM) corporate bonds are an asset class that remains inefficient and under-researched enough to reward active security selection, potentially allowing active managers to add value consistently over time.


One source of active opportunity is lack of dedicated sponsorship. Of the roughly US$2.4 trillion EM corporate debt market, only about 5% is owned by dedicated investors—entities that specialize in this asset class and are benchmarked to the JPMorgan CEMBI indices. The rest is held by retail investors, crossover investors (e.g. investment-grade managers dipping into high-yield names to pick up additional yield) and other non-specialists. Non-specialist inves- tors tend to be slower to identify and exploit mis-pricings or dislo- cations in the market. They can also be more sensitive and likely to sell in response to negative news flow, which may cause them to miss out on longer-term fundamental improvements. A second source of opportunity is the wide dispersion of valua- tions. For example: the marks in the chart below show the yields to maturity (YTM) at which new single B rated issues have come to market since 2017. The line in the chart shows the average YTM on the B rated portion of the EM corporate index. The yields have been widely dispersed, ranging from less than 4% to almost 15%, for a single rating category. This implies that being able to differentiate between good and bad credits is crucial to success in this asset class, and that managers need enough research resources to do so. The third potential source of active advantage is the research demands of the asset class. More than 1,700 new issuers have come to the EM corporate bond market since 2005—an average of around 70 new names a year for the high-yield segment alone. New issues often come up at short notice. Analysts typically have an underwriting period of three to five days to assess the industry, the management team, perhaps even a new country, and build an analytical model. We believe one of our credit analysts’ advantages is being able to tap into our firm’s EM equity resources. For example, most EM compa- nies issue shares well before they enter the bond markets, so although a company may be a new bond issuer, our EM equity team may have been covering it for decades. Our EM credit analysts also sometimes draw on the expertise of our developed-market industry specialists, looking for parallels that can be applied in EM, identifying potential success factors or warning signals. Having these research resources enables us to be highly selective – we only participate in 10% to 15% of new issues – and to


16 November 2020 portfolio institutional roundtable: Emerging market debt


Page 1  |  Page 2  |  Page 3  |  Page 4  |  Page 5  |  Page 6  |  Page 7  |  Page 8  |  Page 9  |  Page 10  |  Page 11  |  Page 12  |  Page 13  |  Page 14  |  Page 15  |  Page 16  |  Page 17  |  Page 18  |  Page 19  |  Page 20  |  Page 21  |  Page 22  |  Page 23  |  Page 24